How an expensive mistake created an opening to merge Anchorage utilities

The mistake that will bring down Municipal Light & Power grew from the illogic of its separate existence in the first place. Now voters will have a chance in April to end the company.

If one utility had served the Anchorage bowl, it would not have built the new power plant ML&P constructed near Muldoon Road and the Glenn Highway. The cost of Plant 2A helped balloon the company's rates, leading to a revolt among business leaders and now the sale of the utility.

Mayor Ethan Berkowitz proposes selling ML&P to Chugach Electric, the co-op serving most of the municipality, for more than $1 billion. The deal appears sound and even Berkowitz's major opponent in the April election has yet to find anything wrong with it.

[Anchorage mayor proposes to sell ML&P to Chugach Electric in $1 billion deal]

Berkowitz is on the threshold of pulling off something mayors have wanted to do for almost 40 years.

Anchorage grew up with ML&P within its city limits and the rural electric co-op outside. But that stopped making sense in the 1970s, when the city outgrew its boundaries and the edge of town became what we now call Midtown.

Since the entire bowl came under a single local government in 1975, the old city limit along Northern Lights Boulevard has survived only for two former city utilities, ML&P and Solid Waste Services.

Who would have guessed that would last this long?

Mayors at least since Tony Knowles, elected in 1981, have wanted to merge the two electric companies. But skilled staff at ML&P kept rates low, so a sale never became a top priority. And longtime managers found legal and technical ways to make a merger difficult for their bosses.

Southcentral Alaska's five utilities — an absurd number for our small population — have existed as worlds unto themselves, nursing decades of rivalries with their neighbors. Executives, lawyers and engineers made money by being separate and maintaining conflict.

Chugach was part of the problem. When Mayor Mark Begich took a serious run at merging ML&P and Chugach a decade ago, the co-op faced serious financial problems and a gas supply crisis. It had been through years of nasty election campaigns that repeatedly shifted control of its board of directors.

A conservative group opposed to the utility's union periodically took over the board. But those opponents finally gave up the fight and union-supported board members have run the utility for several terms.

They have done a great job. Now Chugach has ample gas, its balance sheet is strong, its credit rating has improved, and it can credibly borrow the $712 million it will need to buy ML&P.

One important step came when Chugach replaced a lot of its outdated generation equipment with a big, efficient plant on Minnesota Drive, completed in 2013. At Begich's insistence — and I was involved as a consultant at the time — ML&P bought 30 percent of that plant.

It should have bought more.

Instead, under Mayor Dan Sullivan, the utility embarked on the $300 million Plant 2A near Muldoon Road, completed in 2016. Matanuska Electric Association and Homer Electric Association also built new plants.

At least one of those plants was extra. We'll pay for that through our rates for the next 20 years or more.

[Railbelt utilities' rivalries are wasting millions of dollars]

Utilities had projected electrical use going up forever. I remember a manager telling me conservation would never work because of the tragedy of the commons — the theory that human self-interest always leads inexorably to waste of resources.

He was wrong. ML&P's electrical peak demand has steadily declined. It's down more than 9 percent over a decade.

Early last year, the consequences of over-investment and declining sales hit ratepayers, and they were not happy. Bill Popp, CEO of the Anchorage Economic Development Corp., began getting calls from members.

"I'm getting horror stories of these incredible increases for large employers," Popp said. "They're all seeing these incredible impacts to their bottom line."

He convened meetings between the business leaders, the utilities and an outside consultant. It didn't take long to come up with the solution.

"There is no city of our size nationally that had two utilities serving the same city," he said. "We kept waiting for the backlash, and there wasn't any. It was fascinating to me. It was this 'duh' moment to me. Of course they should be one utility."

Berkowitz picked up the issue, obtaining an outside estimate of ML&P's value and privately meeting with stakeholders, including the union, to find out what it would take to avoid opposition, said City Manager Bill Falsey.

Other entities also wanted to buy the company, but none could promise to combine the two utilities, Falsey said. He would not reveal those potential buyers' identities or the size of their offers, nor would he provide the city's value estimate, although he said he hopes to release it soon.

Berkowitz himself was unavailable because he is on vacation. His communications director would not reveal where he is.

No one has come out to oppose the sale.

The union, the International Brotherhood of Electrical Workers, remains uncommitted as it negotiates contract changes, but Chugach CEO Lee Thibert expects to work that out. He has already promised no layoffs.

If Chugach has to give the union a sweetener, the cost will be small compared to the benefit of the entire deal.

Thibert said savings will most likely will come as Chugach closes ML&P's oldest plant, near Ship Creek, and its offices, and shuts down Chugach's own oldest plant and another older unit to be determined, and as it allows attrition, around 5 percent a year, to reduce staff over five years.

Berkowitz's main mayoral opponent, Rebecca Logan, who once was a Chugach board chair (and was supported by the anti-union faction), said the deal looks good to her, although she wants more details to say for sure.

What's for a conservative to oppose? The deal reduces the size of government, consolidates services and responds to the demands of business leaders.

Anchorage has been through utility privatization before. Those wars taught the political lesson that voters will go along only as long as no organized opposition emerges.

This could be the magic moment when that happens and we solve a 40-year-old problem.

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